Testimony to the Vermont House Human Services Committee

January 29, 2013

Good morning, Madam Chairman, members of the committee.

My name is Jack Hoffman. I’m senior analyst for Public Assets Institute, a Montpelier-based non-profit, non-partisan, public policy think tank that was established 10 years ago.

For those of you who don’t know about Public Assets Institute, we analyze state fiscal policy with the ordinary Vermonter in mind. We gather the facts, usually from state or federal data bases, and explain what they mean in a way that people can understand.

We do this because we believe that government should be using the people’s money for the people’s well-being. And giving Vermonters the tools and information to speak up in the public debate is the best way to make that happen.

We regularly publish reports, fact sheets, and blog posts on our website www.publicassets.org. We put out a bi-monthly electronic newsletter as well. If you’re not on our list to receive notices of our publications and would like to be, please let me know.

I sent along links to two studies. One is from the Political Economy Research Institute (PERI) at the University of Massachusetts at Amherst. This is a group of economists who work with us and our counterparts in the other New England states. The PERI study, “Early Childhood Education as an Essential Component of Economic Development,” written by Arthur MacEwan, speaks to the economic benefits of early care and education.

• Beyond its direct role in economic development, early childhood education is important as a tool to move toward greater social equity.
• The economic gains are reflected in the higher salaries that children earn later in life, which also result in greater tax payments.
• Availability of child care increases workforce participation of the parents, especially mothers.
• There is increased productivity from parents who can have the peace of mind knowing that their children are safe and well cared for by high-quality child care providers.

The second study is from the Center on Budget and Policy Priorities in Washington, D.C. The Center analyzes federal fiscal policy, and Public Assets is part of a national network developed by the Center to analyze state fiscal policy. The Center’s report cites numerous studies on the earned income tax credit (EITC) and concludes that it:

• Encourages work.
• Reduces poverty.
• Provides a short-term safety net.
• Improves children’s school performance.

These are all goals, I might point out, the governor laid out in his budget address.

For all of the reasons spelled out in the PERI report, by the other witnesses here this morning and by the governor, Vermont should expand the availability of child care.

The Legislature, however, should find a way to fund it other than raising income taxes on 44,000 of the poorest, working Vermonters. Vermont has a long history of having a progressive income tax. Higher levels of income are taxed at higher rates because we believe that those with greater income have a greater ability to pay. This proposal to raise $17 million from working Vermonters in the lowest income brackets flies in the face of that long tradition. Vermont, like the rest of the country, also has a growing problem of income inequality. Between 1981 and 2005, the share of income going to the top 1 percent of Vermont increased three-fold: from 6 percent to 19 percent. Cutting the EITC only exacerbates that problem.

Trade-off
The proposal has been described as a “trade-off,” but it is difficult to see it that way. It raises income taxes on 44,000 poor working tax filers to expand a program that supports about 7,000 families. There are about 5,900 families now receiving the child care subsidy and the estimate is that another 900 families will be served with the expansion. In some cases, families will lose some of their tax credit and also see a reduction in their child care costs, which could be viewed as a trade-off. However, about two-thirds of the families in the child care program—about 4,000 families—now receive a 100 percent child care subsidy—because they are at or below 100 percent of the federal poverty level. The expansion of the subsidy program will not improve their family finances. They don’t pay for child care now because they can’t afford to, and they won’t pay under the expansion. However, they will lose much of their EITC making these families poorer. Since these are the poorest families and the EITC is greater for those with the lowest earnings, these families will shoulder the bulk of the EITC cut.

Forty-nine percent growth
Much has been made of the 49 percent increase in the cost of EITC between 2003 and 2011. During that period, the number of people claiming the EITC increased by 27 percent. And in the last five years—from 2007 to 2012—real income for the bottom two quintiles has dropped. In other words, the cost of the EITC has increased because of a growing need, much of it driven by the Great Recession.

In the last few years, there has been a lot of discussion in Montpelier about the need for indicators and performance measures. It’s a helpful development, but we need to understand what the indicators mean. The fact that 3SquaresVt, Reach-Up, LIHEAP, EITC, Medicaid, the entire Agency of Human Service Budget have all gone up in the recent years is not an indication that Vermont is too generous or that there is something wrong with these programs. These are signs of economic distress for Vermont families. There’s a proposal to cut off Reach Up to force people to work, but there were fewer jobs in Vermont’s private sector in 2012 than there were in 2001. The EITC supplements the income of people who are working in jobs with wages too low to make ends meet. Reducing EITC undermines the administration’s stated goal of getting people back to work.

Alternatives for funding
The governor said last week, and the evidence supports this, that early care and education are good for the state and the state’s economy, which means we will all benefit. We agree and think it’s only fair to ask the entire state to support this effort to expand child care. There are better ways to generate $17 million. One possibility we are looking at would be to change the treatment of itemized deductions. We are working with the Institute on Taxation and Economic Policy in Washington, D.C., which did a study a couple of years ago showing such changes could raise about the same amount of money the governor has asked for. As soon as our research is finished, we’ll be happy to report back to you and other committees with our findings.

People’s budget
In closing, I’d like to make an additional point.

Last year, the Legislature took an important step when it adopted a new statutory purpose for the state budget. The new language says, in part:

“The state budget, consistent with Chapter I, Article 7 of Vermont’s constitution, should `be instituted for the common benefit, protection, and security of the people, nation, or community….’ The state budget should be designed to address the needs of the people of Vermont in a way that advances human dignity and equity.

“Spending and revenue policies will seek to promote economic well-being among the people of Vermont, and foster a vibrant economy. Integral to achieving the purpose of the state budget is continuous evaluation of the raising and spending of public funds by systems of outcome measurement based on indicators that measure success in accomplishing the purposes of the state budget.

“Spending and revenue policies will reflect the public policy goals established in state law and recognize every person’s need for health, housing, dignified work, education, food, social security, and a healthy environment.”

In short, what this new statement of purpose does is move away from the “manage-to-the-money” approach to budgeting, which has become prevalent over the past two decades, to an approach that puts people first. I was a political reporter covering Montpelier during the recession of the early 1980s—and also the recessions of the early 1990s and early 2000s. In the recessions of the 80s and 90s, the state didn’t have the manage-to-the-money attitude: making do with whatever money was available and cutting when the money ran out. We did what needed to be done to help Vermonters in difficult times and spent money that sometimes we didn’t have. We ran deficits to meet people’s needs. We responded to those earlier recessions much the way the state and the administration responded to Irene. We put people first.

Cutting the EITC to pay for expansion of child care is recommitting the state to managing-to-the-money. My understanding is that the administration did not look anywhere else for the $17 million, only the EITC. So it’s up to the Legislature to take the new budget language to heart and find funding for the child care expansion without hurting some of the most vulnerable people in the state.